December 21, 2017

The Economics Debate, again and again

The debate on the economics profession – its alleged ills and failings -- abates at times, but never ends. A recent piece in The Guardian taking the profession to task for its lack of reform has prompted a response from a group of economists. I thought it was time to re-up my own views on this debate, in the form of two sets of ten commandments. The first set is directed at economists, and the second to non-economists.

Ten commandments for economists

1. Economics is a collection of models; cherish their diversity.

2. It’s a model, not the model.

3. Make your model simple enough to isolate specific causes and how they work, but not so simple that it leaves out key interactions among causes.

6. To map a model to the real world you need explicit empirical diagnostics, which is more craft than science.

7. Do not confuse agreement among economists for certainty about how the world works.

8. It’s OK to say “I don't know” when asked about the economy or policy.

9. Efficiency is not everything.

10. Substituting your values for the public’s is an abuse of your expertise.

Ten commandments for non-economists

1. Economics is a collection of models with no predetermined conclusions; reject any arguments otherwise.

2. Do not criticize an economist’s model because of its assumptions; ask how the results would change if certain problematic assumptions were more realistic.

3. Analysis requires simplicity; beware of incoherence that passes itself off as complexity.

4. Do not let math scare you; economists use math not because they are smart, but because they are not smart enough.

5. When an economist makes a recommendation, ask what makes him/her sure the underlying model applies to the case at hand.

6. When an economist uses the term “economic welfare,” ask what s/he means by it.

7. Beware that an economist may speak differently in public than in the seminar room.

8. Economists don’t (all) worship markets, but they know better how they work than you do.

9. If you think all economists think alike, attend one of their seminars.

10. If you think economists are especially rude to non-economists, attend one of their seminars.

I have spent enough time around non-economists to know that their criticism often misses the mark. In particular, many non-economists tend not to understand the value of parsimonious modeling (especially of the mathematical kind). Their typical riposte is: “but it is more complicated than that.” It is of course. But without abstraction from detail, there cannot be any useful analysis.

Economists, on the other hand, are very good at modeling but not so good at navigating among their models. In particular, they often confuse a model, for the model. A big part of the problem is that the implicit scientific method to which they subscribe is one in which they are constantly striving to achieve the “best” model.

Macroeconomists are particularly bad at this, which accounts in part for their dismal performance. In macroeconomics, there is too much of “is the right model the classical or the Keynesian one” (and their variants), and too little of “how do we know whether it is the Keynesian or the classical model that is the most relevant and applicable at this point in time in this particular context.”

Comments

I still miss (for economists) "The economy is human. Take into account humanity: goal setting & circumventing causality."https://twitter.com/WimNusselder/status/640421356690128896
Which amounts to: Be aware of complexity. With reference to the Cynefin framework: Economies are ideally and to a substantial extent complex adaptive systems (complex domain) rather than complicated, let alone obvious systems. If economists and (on their advice or of that of their long dead forebears) politicians treat economies as ordered (complicated or obvious) systems, that will damage their adaptivity and may plunge them into chaos. Assume interaction rather than (unambiguous) causality as a rule, with clear causality as a usually temporary and artificial exception, not least artificial because of the performative effect of our own economic models. (Eg humans behaving selfish and rational because of our Homo economicus assumptions and markets behaving recognisably as they do because we assume them to behave as such.)

If when setting their risk weighted capital requirements for banks, the regulator’s economists used the ex ante perceived risk of bank assets as proxies for the ex post risks to banks. How should we classify that?

Spot on! The same goes for Econometrics and Finance, possibly a fortiori. Cf. the current bitcoin discussions. There is no single best story. But there are good and bad, smart and not-so-smart stories.